Alternation of Wave Patterns

Video Transcription:

Hello, traders welcome to the Elliott Wave Theory course and the third module, Advanced Elliott Wave Analysis. In this lesson we are going to talk about alternation. And alternation is kind of a misplaced concept inside the Elliott Wave theory because it is actually not taught very much, because some analysts think that it’s not important. But actually alternation is a very important concept inside this theory, because it will help you determine what to look for on the next set of waves.

Alternation Elliot Wave Theory

So let’s start by defining what alternation is. There are no clear guidelines for alternation, but this concept is actually important when analyzing a pattern or labeling waves. The analyst has to expect a difference in the next expression of a similar wave. So this is the basic, or the core, of this concept. What Elliott meant is that if you were looking at a pattern, you have to look at the similar waves and they will differ in their formation. This means that if you are looking at a 5-wave impulse, wave 2 and wave 4 will be different in its formation, or in their formation.

Alternation does not imply causation, this means that just because of it, we can’t predict how the next sets of waves are going to be formed, okay? Now, here is where this becomes a little bit more completed, but it’s actually not as complicated as you think, okay? Just because wave 2 of a 5-wave impulse is a sharp correction, it doesn’t mean that wave 4 will be a sharp correction or it doesn’t mean that wave 4 will be a sideways correction, okay?

But it’s important to use alternation not as a prediction tool but as an elimination tool. With alternation you will know what not to expect on the next set of waves. So this is how you are going to use this concept. If wave 2 is a steep correction or a sharp correction, wave 4 will not be a sharp correction. So you will be looking for maybe a sideways correction or a not so steep angle for wave 4. This means that you are going to use your Fibonacci retracement levels to pinpoint better entries when you are actually trading wave 5 of the 5-wave impulse. With this lesson you are going to learn not to assume that because the last market cycle behaved in a certain matter, this one is sure to do the same. Elliott pointed out that alternation is practically a law of markets. So this means that in his studies, Elliott found that alternation is actually the rule when you are looking at patterns.

Alternation patterns

So we are going to start with alternation with impulses. If wave 2 of a 5-wave impulse is a short correction, expect wave 4 to be a sideways correction and vice versa. This is basically what alternation is and what you need to be looking for. I’m going to show you this little diagram that shows you how alternation works. In a bullish market if wave 2 is a sharp correction, you are going to look for a sideways correction on wave 4 and vice versa. If we have a sideways correction on wave 2, you are going to look by elimination a sharp correction on wave 4. In a bearish market, it works the same way. If we have a sharp correction on wave 4, you are going to look for a sideways correction on wave 4 and if you have a sideways correction on wave 2, you are going to look for a sharp correction on wave 4. Now, let’s go to the MT4 platform and look for an example for you to be able to see how this really looks like in real price action.

Okay, so here we are on this GBP with the four hour chart and as you can see right here, we have a 5-wave structure or a 5-wave impulse. This is wave 1, all the impulse, let me just make it a little bigger for you guys. Okay, this is wave 1. Here we have wave 2, which is a very sharp corrective move to the downside, then we have wave 3 that ends at this high right here. And as you can see the corrective move of wave 4 is a sideways correction or not as sharp as a corrective move as wave 2, and I’m going to show you with some Fibonacci level, let me just color them black. There you go, you can see that wave 2 retraces 764 of wave 1 and wave 4 retraces around, or less than 50%, between the 50% and 32%. So you can see that alternation will give you or will tell you what behavior to expect on the next set of waves.

Adam

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